Economic and Monetary Union

Economic and Monetary Union

A group of independent countries with a common market, no trade barriers between members, and a single currency. That is, in addition to the single currency, there are no tariffs on goods and services and citizens of participating countries may live and work in other countries with no restrictions. An economic and monetary union may be considered, for many (but not all) economic purposes, a single country. Political union and some autonomy in each country with respect to economic policy are the only aspects that keep an economic and monetary union from complete economic integration.

Economic and Monetary Union (EMU)

the unification of the economies of member countries of the EUROPEAN UNION (EU) through the introduction of a common (‘single’) currency and the harmonization (and eventual centralization) of fiscal policy. EMU represents the final stage in a long process towards integration which had its roots initially in the establishment of a ‘common market’ by the Treaty of Rome (1958) and which was then propelled further by the establishment of the EUROPEAN MONETARY SYSTEM (EMS) to coordinate the exchange rates of member countries' currencies and the attempt to create a ‘single market’ through the harmonization of business practices (See SINGLE EUROPEAN ACT, 1986). See TRADE INTEGRATION entry.

At present movement towards ‘monetary union’ is far more advanced than that of fiscal harmonization. The ‘building blocks’ of monetary union were put in place by the MAASTRICHT TREATY (1991) which envisaged the introduction of a single currency for the EU with EU-wide monetary policy being controlled by a EUROPEAN CENTRAL BANK (ECB). The ECB was duly established in 1998 to oversee EU member countries' ‘readiness’ for the introduction of EMU in January 1999. This was focused on conformity to various ‘convergence’ criteria, including low inflation (under 3%) and government debt limits (current budget deficits not to exceed 3% of GDP, and total outstanding debt not to exceed 60% of GDP). Member countries meeting the convergence criteria were required to decide whether to join EMU at the outset or delay their entry to a later date. Eleven of the 15 EU members opted for immediate membership, while the UK, Norway, Greece and Sweden adopted a ‘wait-and-see’ stance. In 2001 Greece joined the EMU.

The inception of EMU involved a number of stages. On 1 January 1999 the 11 founding members of EMU established irrevocably fixed exchange rates between their currencies; in 2002 individual national currencies were replaced by a new single currency – the EURO (see EURO entry for further details). The Euro itself was introduced in January 1999 as a book-keeping ‘unit of account’, but took on a physical identity (i.e. as notes and coins) in 2002 and serves as a ‘medium of exchange’ used to finance personal and business transactions within the EU. At present the exchange rate of the Euro ‘floats’ against other currencies such as the Japanese yen, US dollar and the UK pound.

Advocates of EMU argue that a common currency will create a more stable economic environment as distortions such as the exchange rate cost and risks associated with the conversion of national currencies will be removed. This will be reinforced by the ECB's primary objective of maintaining a regime of low inflation. Also a common currency will have the advantage of enhancing price transparency so that price differentials for the same product as between EU countries will tend to disappear and prices will tend to be driven down to the level of the most efficient supply source. However, other commentators point out that an EU-wide ‘one fit’ monetary policy has its limitations given continuing business cycle and structural disparities between EU members. Also, by definition, the adoption of a common currency removes the external exchange rate option of improving a country's economic position by devaluing/depreciating its currency, placing the whole burden of ‘adjustment’ on internal measures. Furthermore, at present members are relatively free to pursue their own independent budgetary policies (although they are expected to observe Maastricht ‘Stability Pact’ restraints as noted above, (current budget deficits below 3% of GDP and an overall debt limit of 60% GDP)) increasing the danger that fiscal stimulation may conflict with a ‘tight’ monetary policy A particular problem facing the EU is that chronic unemployment which can only be effectively tackled, as some economists argue, by supply-side policies aimed at improving labour market flexibility rather than monetary measures alone.

Regarding the issue of the UK's future entry into the EMU, the present Labour government is ‘in principle’ in favour of joining the EMU but only if a high degree of ‘convergence’ with the EMU-zone economies has been attained, and then only after a National Referendum of the electorate secures a majority vote in favour. The government has proposed five ‘tests’ for joining the EMU relating to ‘convergence’, ‘flexibility’, ‘inward investment’, ‘financial services’ and ‘employment’. These include ‘convergence’ with the EMU-zone with regard to inflation rates (the UK's current (as at January 2005) inflation rate is under 2%, and the EMU-zone rate is under 2%) and government debt-GDP ratios (the UK's current rate is below 40% which conforms to the EMU-zone maximum permitted rate of 60%). The other criteria are more ‘open-ended’ and can be interpreted in a number of ways; for example, the UK's leading position as a recipient of inward investment and a major provider of financial services could be put under threat as a number of major MULTINATIONAL ENTERPRISES have declared that they intend to reduce their investments in the UK or even pull out if the UK continues to remain outside the EMU-zone. A big question mark if the UK were to join the EMU hangs over the initial exchange rate of the pound to the EURO. If the rate is too high the results could be disastrous, as was the case when the UK joined the ‘exchange rate mechanism’ of the old European Monetary System in the early 1990s.

economic and monetary union (EMU)

the unification of the economies of member countries of the EUROPEAN UNION (EU) through the introduction of a common (‘single’) currency and the harmonization (and eventual centralization) of fiscal policy. EMU represents the final stage in a long process towards integration that had its roots initially in the establishment of a common market by the Treaty of Rome (1958) and has been propelled further by the establishment of the EUROPEAN MONETARY SYSTEM (EMS) to co-ordinate the exchange rates of member countries’ currencies and the attempt to create a ‘single market’ through the harmonization of business practices (see SINGLE EUROPEAN ACT, 1986).

At present, movement towards ‘monetary union’ is far more advanced than that of fiscal harmonization. The ‘building blocks’ of monetary union were put in place by the MAASTRICHT TREATY (1991), which envisaged the introduction of a single currency for the EU, with EU-wide monetary policy being controlled by a EUROPEAN CENTRAL BANK (ECB). The ECB was duly established in 1998 to oversee EU member countries’ ‘readiness’ for the introduction of EMU in January 1999. This was focused on conformity to various ‘convergence’ criteria, including low inflation (under 3%) and government debt limits (current budget deficits not to exceed 3% of GDP and total outstanding debt not to exceed 60% of GDP). Member countries meeting the convergence criteria were required to decide whether to join EMU at the outset or delay their entry to a later date. Eleven of the 15 EU members opted for immediate membership, while the UK, Denmark, Greece and Sweden adopted a ‘wait-and-see’ stance. Greece joined the EMU in 2001.

The inception of EMU involves a number of stages. On 1 January 1999 the 11 founding members of EMU (all members of the existing ‘exchange-rate mechanism’ of the EMS) established irrevocably fixed exchange rates between their currencies. In stage two (2002), individual national currencies were replaced by a new single currency - the euro (see EURO entry for further details). The euro was introduced in January 1999 as a bookkeeping ‘unit of account’ but took on a physical identity (i.e. as notes and coins) in 2002, serving as a ‘medium of exchange’ to finance personal and business transactions within the EU. At present, the exchange rate of the euro and the non-euro EU national currencies ‘float’ against other currencies such as the Japanese yen and US dollar.

Advocates of EMU argue that a common currency will create a more stable economic environment as distortions such as the exchange-rate cost and risks associated with the conversion of national currencies will be removed. This will be reinforced by the ECB's primary objective of maintaining a regime of low inflation. Also, a common currency will have the advantage of enhancing price transparency so that price differentials for the same product as between EU countries will tend to disappear and prices will tend to be driven down to the level of the most efficient supply source. Other commentators, however, point out that an EU-wide ‘one-fit’ monetary policy has its limitations given continuing business cycle and structural disparities between EU members. Also, by definition, the adoption of a common currency removes the (external) exchange-rate option of improving a country's economic position by devaluing/depreciating its currency placing the whole burden of ‘adjustment’ on internal measures (see ADJUSTMENT MECHANISM, BALANCE OF PAYMENTS EQUILIBRIUM). Furthermore, at present, members are relatively free to pursue their own independent budgetary policies, although they are expected to observe Maastricht ‘Stability Pact’ restraints, as noted above (current budget deficits below 3% of GDP and an overall debt limit of 60% of GDP), increasing the danger that fiscal stimulation may conflict with a ‘tight’ monetary policy. A particular problem facing the EU is that of chronic unemployment, which can be effectively tackled only, as some economists argue, by supply-side policies aimed at improving labour market flexibility rather than monetary measures alone.

Regarding the issue of the UK's future entry into the EMU, the present Labour government is ‘in principle’ in favour of joining the EMU but only if a high degree of ‘convergence’ with the EMU-zone economies has been attained and, then, only after a national referendum of the electorate secures a majority vote in favour. The government has proposed five ‘tests’ for joining the EMU: ‘convergence’, ‘flexibility’, ‘inward investment’, ‘financial services’ and ‘employment’. These include ‘convergence’ with the EMU zone with regard to inflation rates (the UK's current (as at March 2005) inflation rate is just under 2%, as is the EMU-zone rate) and government debt - GDP ratios (the UK's current rate is below 40%, which conforms to the EMU-zone maximum permitted rate of 40%). The other criteria are more ‘open-ended’ and can be interpreted in a number of ways: for example, the UK's leading position as a recipient of inward investment and major financial services could be put under threat as a number of major MULTINATIONAL COMPANIES have declared that they intend to reduce their investments in the UK, or even pull out, if the UK continues to remain outside the EMU zone. A big question mark if the UK were to join the EMU hangs over the initial exchange rate of the pound to the EURO. If the rate is too high, the results could be disastrous, as was the case when the UK joined the ‘exchange rate mechanism’ of the old EUROPEAN MONETARY SYSTEM in the early 1990s.

As a follow-up, the president of the European Council is invited to develop, in close collaboration with the president of the Commission, the president of the Eurogroup and the president of the ECB, a specific and time-bound roadmap for the achievement of a genuine Economic and Monetary Union (EMU)," the draft said.

There are currently three regional monetary unions--the West African Economic and Monetary Union (WAEMU); the Economic and Monetary Community for Central Africa (CAEMC) and Common Monetary Area (CMA) or the 'rand zone' in Southern Africa, comprising Lesotho, Namibia, South Africa and Swaziland.

The second part, dedicated to topics in differentiation in EU law and policy, focus on the areas of Economic and Monetary Union, the Common Agricultural Policy and EU counter-terrorism following enlargement as well as on the status of Turkish Cypriots in regard to EU citizenship.

The Allensbach Opinion Research Institute, Germany's oldest polling organization, has seen support for economic and monetary union rise dramatically among the country's elites even as the rest of the population grows less and less enthusiastic.

Investor sentiment toward the mark shifted abruptly in early June with the defeat of a referendum in Denmark on the Maastricht treaty--a treaty outlining steps toward European union, including economic and monetary union and the creation of a single European currency.

Upon accession, the ten countries will join the European Economic and Monetary Union (EMU) as "member states with a derogation"; their central banks will become part of the European System of Central Banks.

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